In a setback for Merck, a federal judge refused to dismiss a whistleblower lawsuit that accuses the drugmaker of distorting so-called nominal pricing in order to build a huge customer base for its Nuvaring contraception device and three contraceptive pills. The lawsuit, which was filed by two former employees, also claims the drugmaker offered kickbacks to physicians in exchange for prescribing a cancer medication. At issue is an alleged scheme in which Organon – which Merck (MRK) inherited as part of its 2009 purchase of Schering-Plough – offered a steep discount to Planned Parenthood for its contraceptive products, but in fact, reported this as a nominal price to government programs. In doing so, Organon hoped that young women who used its products would become paying customers later through private insurance, a tactic described in the lawsuit as a spillover effect. By way of background, the Medicaid Rebate Statute requires drugmakers to report their ‘best prices’ and other pricing info to the federal government in order to ensure Medicaid obtains the same discounts and concessions given other customers. An exception to this rule allows drugmakers to exclude from the prices they report any discounted prices that are ‘nominal’ in amount. Organon allegedly excluded those nominal prices from its reports. By reporting the discount at a nominal price, Organon concealed that sales were actually contingent on Planned Parenthood buying 360,000 NuvaRing devices each year. From 1999 to 2005, Organon sold each NuvaRing for $3, which was below the $34 wholesale acquistion cost or the stipulated rebate off the average manufacturer’s price. In this way, Organon allegedly failed to comply with the Medicaid best pricing rule, which meant the drugmaker avoided paying certain rebates. In short, Organon essentially gave away NuvaRing and its other contraceptives hoping that young women who went to Planned Parenthood facilities would initially be given a low-cost form of birth control. And if the gambit worked, NuvaRing or any of the three pills could become the contraceptive of choice for countless women who could be expected to engage in family planning for the next 20 years or so.